Often pensions are the second, if not the most valuable asset in the ‘’matrimonial pot’ during divorce proceedings. And amongst the options open to the Court in relation to these are ‘pension sharing orders’ and ‘pension attachment orders’.
A pension sharing order transfers a specified percentage of a pension fund into a separate fund for the benefit of the receiving party. Once such an order has been implemented, the parties can usually contribute to this fund, ‘drawdown on’ it (i.e. withdraw money) and generally deal with their pension as they choose to, without impacting on the other party’s fund. By comparison, a pension attachment order shares a percentage of the pension income and/or lump sum but if the pension holder dies, the surviving party’s income from that pension fund will cease.
One alternative to pension sharing or pension attachment orders is ‘off-setting’. This is where one party ‘off-sets’ their interest in the other party’s pension against other non-pension assets such as equity in property or bank savings or investments of equal value. When calculating the appropriate ‘off-set’ figure it is important to appreciate that a pound in a pension pot is not the same as a pound in a bank account or even a property. There are various reasons for this, including the fact that there are restrictions on when money in a pension fund can be accessed, both in terms of income and lump sum, and there may be tax to pay on pension income – and in some circumstances lump sum withdrawals as well. It is therefore advisable to seek advice from a pension expert or actuary on how to calculate the appropriate ‘off-set’ figure but even if you choose to take this option you should always remember that you are comparing two different types of assets, one a future income source, the other a more immediately available resource. It is often said that it is like trying to compare apples with oranges.
In certain cases, the involvement of a pension expert or actuary will be essential. In particular, cases involving final salary pension schemes, defined benefit schemes and public sector schemes may require an expert’s input into the true value of the pension fund and often a transfer or cash equivalent value can underestimate a fund value. With final salary schemes, where the member can retire after a fixed number of years and often long before the normal retirement age, the full pension benefits paid to an individual who could even be in their early 50’s are far more valuable than the cash equivalent value would suggest. Police, Fire Service and Armed Forces pension schemes, for example, require careful consideration and each pension will be governed by a specific scheme, depending on when the fund was first set up. With the Armed Forces Pension Scheme for example, there are three different schemes, all of which differ in some way and would impact on the value of the pension. In some cases there will be more than one transfer value for a member. It is also important that early departure payments (EDPs) are taken into account where relevant, so a projection of EDP benefits should be obtained.
When reviewing the value of a pension fund, experts will take into account a number of considerations, including the specific benefits of the individual scheme.
The ‘true’ or ‘fair’ value of a pension, may significantly exceed the cash equivalent value provided by the pension trustees. One example I have seen related to a defined benefit pension with Aviva which had a stated cash equivalent value of £18,818. However, the scheme was obligated to pay a Guaranteed Minimum Pension (GMP) at the age of 60 and consequently the ‘true’ comparable value of the pension was considered to be £85,053 and not £18,818!
It is not always a case of concentrating on pension fund values and sometimes, particularly cases involving couples approaching retirement, the projected pension income is more relevant. In such cases it is appropriate to calculate the level of pension share required to achieve equality of pension income for the divorcing couple on retirement, taking into account all of the pension resources.
Given the value of pension assets, and the intricacies of certain schemes, it is important that the right questions are asked on divorce to ensure that the pension resources are divided in a fair way. At Stowe Family Law, our solicitors regularly deal with cases involving valuable and complicated pension assets and regularly work with pension experts to ensure that a fair outcome is achieved.